Question

Define 'prudence principle'

a) Recording transactions at the earliest
b) Estimating lower value for assets and higher value for liabilities
c) Using market value for assets and liabilities
d) Paying off liabilities quickly

Answer 1

The prudence principle in accounting promotes caution by estimating lower values for assets and higher values for liabilities.

Step-by-step explanation:

The prudence principle in accounting refers to estimating lower values for assets and higher values for liabilities. It is a concept of conservative accounting that promotes caution in financial reporting by erring on the side of understating assets and overstating liabilities.For example, if a company estimates the value of its inventory to be lower than its actual market value, it is practicing prudence. Similarly, if a company estimates the liability for potential legal claims to be higher than expected, it is also practicing prudence.